Say It Ain’t So, Fed, Say It Ain’t So

The Federal Reserve broke my heart recently.

Now you might think that today’s post is about something to do with monetary policy, or the taper, or something high falutin’ like that.

Nope. It’s about a game. The Fed Chairman game, to be specific. And I’m heartbroken because the Federal Reserve took it down:

Thank you for your interest in the monetary policy game, Chair the Fed. The game has been a useful and fun tool to learn more about monetary policy. However, the Fed has updated its approach to monetary policy, and the changes are not readily accommodated within the existing structure of the game. As of June 1, 2021, the game is no longer available.
You can learn more about the Fed’s policy updates here. Be sure to also check out FOMC Rewind, a texting video series that summarizes the FOMC’s meeting statements.
In the meantime, we encourage you to connect with us on Twitter, Instagram, LinkedIn, and Facebook.

So what was the game all about? Well, you got the chance to “be” the Fed Chairperson for sixteen quarters, or four years. You had to “react” to events that took place in the economy by raising or lowering interest rates, in order to meet two objectives. First, you had to make sure that inflation was as close to possible to 2% over the duration of your term, and second, you had to make sure that unemployment was as close as possible to 5% over the duration of your term.

The game was designed with some sort of a payoff between inflation and unemployment, and the reason I use the phrase “some sort of” is because I do not know quite what the functional form was. If you played the game long enough, you figured out pretty quickly that there would be a “crisis” at the end of your fourth quarter in charge. And the remaining 12 quarters were essentially an exercise in firefighting.

Inflation in the game had a way of getting out of hand pretty quickly, and unless you were quick enough to react and adjust real interest rates quickly enough, each successive quarter would have the economy spiraling quickly out of control. Of course, if you knew your monetary theory well enough you could figure out how to “win”.

Here’s a screenshot of the game layout:

Source: The Hill

And here’s an example of how quickly things could get out of hand:


The last sentence from the previous version bears repetition: Of course, if you knew your monetary theory well enough you could figure out how to “win”.

That’s the point!

And that’s why I wish the Fed would reinstate the game. Because playing the game was a great way to get students to learn what monetary policy looks like in action. Sure, you can have students read Mishkin, or any other monetary text. And sure you can have them go through as many PDF’s released by both the Federal Reserve and the RBI. But nothing beats having the class split up into two teams, and playing three rounds each of this game.

After that, explaining the monetary transmission mechanism, or the Philips curve, or inflation expectations, or what “dovish/hawkish” means was child’s play. Because you see, they’d seen the effects for themselves.

So, dear whoever-is-in-charge-of-this-at-the-Federal-Reserve, I completely agree with you when you say that “the Fed has updated its approach to monetary policy, and the changes are not readily accommodated within the existing structure of the game”. No game could (or should) have envisioned the last eighteen months, and its ramifications on monetary policy.

But the game still served as such a magnificent jumping-off point for discussions about what transpired in the last eighteen months. “So now you’ve understood how monetary policy works under usual circumstances and most crises”, you could say at the end of the session. “But what about what the world went through in the last eighteen months? Would these tools be enough? Why or why not? What other tools does the Fed have in its arsenal? Which are most appropriate to use under these circumstances? Why?”

My point is that it was, and it still remains, a great way to introduce the subject to anybody, and especially those of us who’re learning about monetary policy for the first time. And there’s, in my case, about twelve years of students who I subjected to this game – and I’m pretty sure they would all agree with the request I’m about to make.

Please, dear ol’ Federal Reserve. Pretty please, with a cherry on top. Please bring the game back. It’s a great teaching tool, and classrooms are more boring without it.

The Vajpayee Moment in Telecom, IO and Porter’s Five Forces

Vijay Kelkar and Niranjan Rajadhakshya had on op-ed out in Livemint recently on the mess in the telecom sector, and their suggestions for (at least partially) resolving it:

It has been about a year since the Supreme Court instructed telecom companies to share not just their core telecom revenues with the government, but also to take into account promotional offers to consumers, income from the sale of assets, bad debts that were written off, and dealer commissions. The apex court has allowed the affected telecom companies to make a small upfront payment and then pay their excess AGR dues to the government in ten annual instalments, from fiscal year 2021-22 to 2030-31, in an attempt to ease their immediate burden, which has raised concerns about the financial stability of Bharti Airtel and Vodafone Idea. Analysts estimate that the extra annual payments by all telecom firms could be around ₹22,000 crore a year.

Their suggestions for the resolution of this problem involve the issuance of zero-coupon bonds by the telecom companies, along with an option for the government to acquire a 10% equity stake. As always, please read the whole thing.

Now, this may work, this may not work. The more I try to read about this issue, the more pessimistic I get about a workable solution. But we’re not going to get into the issue of finding a “workable” solution today. We’re going to learn about how to think about this issue.

That is, what model/framework should we be using to assess a situation such as this? Kelkar and Rajadhakshya obviously have a model in mind, and they hint at it in this excerpt:

There are three broad policy concerns that need to be addressed in the context of the telecom sector: consumer welfare, competition and financial stability. Possible tariff hikes to generate extra revenues to meet AGR commitments will hurt consumer access. The inability to charge consumers more could mean that the three-player telecom market becomes a duopoly, through either a firm’s failure or acquisition. The banks that have lent to domestic telecom companies are also worried about their exposure in case AGR dues overwhelm the operating cash flows of these companies.

So a solution is necessary, they say, because we need to have a stable telecom market that doesn’t hurt

a) the consumers,

b) the current players in this sector and

c) the financial sector that has exposure in terms of loans to the telecom sector

To this list I would add the following:

d) make sure the government doesn’t get a raw deal (and raw is a tricky, contentious and vague word to use here, but we’ll go with it for now)

e) make sure new entrants aren’t deterred from entering this space (if and when that will happen)

f) suppliers to the telecom sector shouldn’t be negatively impacted

In other words, any solution to the problem must be as fair as possible to all involved parties, shouldn’t change the status quo far too much in any direction, shouldn’t hinder the entry of new competition, and should give as fair a deal as possible to consumers.

Take a look at this diagram: (Credit: Denis Fadeev)

Students who are familiar with marketing theory are going to roll their eyes at this, but for the blissfully uninitiated, this is the famous Five Forces Analysis.

Porter’s Five Forces Framework is a method for analysing competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack thereof) of an industry in terms of its profitability.

Michael Porter’s Five Forces Framework can be traced back to the structure-conduct-performance paradigm, so in a sense, it really is an industrial organization framework:

In economics, industrial organization is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and markets. Industrial organization adds real-world complications to the perfectly competitive model, complications such as transaction costs, limited information, and barriers to entry of new firms that may be associated with imperfect competition. It analyzes determinants of firm and market organization and behavior on a continuum between competition and monopoly, including from government actions.

The point is that if you are a student trying to think through this (or any other problem of a similar nature), you should have a model/framework in mind. “If I am going to recommend policy X”, you should be thinking to yourself, “how will that impact Jio? Airtel? Vi? How will that impact government revenues? What signals will I be sending to potential market entrants? Will consumers be better off, and if so, are we saying that they will be better off in the short run, or on a more sustainable basis?”

Now sure, the diagram doesn’t include government, but the Wikipedia article on the Five Forces does speak about it later, as does the excerpt above from the Wikipedia article on Industrial Organization. More importantly, this framework gives one the impression that we’re dealing with a static problem, with no considerations given for time.

I would urge you to think about time, always, as a student of economics. Whether it be the circular flow of income diagram, or the five forces diagram, remember that your actions will have repercussions on the industry in question not just today, but for some time to come.

So whether you’re the one coming up with a solution, or you’re the one evaluating somebody else’s solution, you should always be evaluating these solutions with some framework in your mind. And tweaking the Five Forces model to suit your requirements is a good place to start!

The State of America, Circa 2021

Kevin Drum has an excellent article out on where the United States of America finds itself in the year 2021, in terms of both medium and long term trends along a variety of dimensions. Here are just the first three from “The Good” section:

  1. Income is up for everyone: men, women, Black, white, Hispanic, rich, poor, and middle class. Data from the CBO is here. UPDATE: Confused by this chart? Explanation here.
  2. Poverty is down by five percentage points since the ’70s.
  3. Federal income taxes are lower for practically everyone.

I found it instructive that he chose to go with 28 Things that he found to be Good, but only 5 that were Bad. That, in a meta-sense is worthy of being included as a 29th Good Thing!

Here are the five Bad Things:

  1. The worst trend of the past couple of decades has been a steady deterioration in average health outside of the upper middle class. Life expectancy has stopped increasing; obesity is up; opioid addiction is up; and deaths of despair are up.
  2. The labor force participation rate has been steadily dropping.
  3. The Black-white education gap has been stubbornly resistant to improvement.
  4. Climate change continues unabated.
  5. Political polarization has gotten worse, thanks mostly to Fox News and, more recently, the rise of Trumpism.

(I haven’t formatted both excerpts as quotes because the WordPress editor, best as I can tell, allows you to either format a piece of text as a numbered list, or as a quote, but not both at the same time. They call this the improved editor, and that makes me weep.)

What might India’s list look like? What do you choose to include and exclude in the good, the bad and the ugly, and what does that tell us about both the country we live in, and the biases that we reveal?

If any student reading this is looking to start a YouTube channel around a fun theme, I have, um, a suggestion for you 🙂

Ashwini Deshpande interviewed by

We were lucky enough to get the chance to speak with Alex Thomas on Friday, and the video of the conversation should be up on YouTube soon enough. In a wonderful coincidence, published an interview with Ashwini Deshpande just a day later. It is a coincidence (to me) because Alex’s textbook is the first macro textbook that I read that speaks extensively about caste, gender and ecology.

Who is Ashwini Deshpande? An economist, currently with Ashoka University, Ashwini Deshpande has been working for a while on the economics of discrimination and affirmative action. The interview, conducted by Rohan Venkat, is a fun and instructive (and what a rare combination that is!) read on both the arc of Ashwini Deshpande’s career, and also on the work that she has done, and is currently doing.

Here’s an excerpt from a different source, before we get to the Scroll interview:

There’s a lovely new working paper by Ashwini Deshpande and Jitendra Singh on female labor force participation in India. We talked a little bit about this last time. Our last conversation was about the honor-income tradeoff, how there are all these things at home that are holding women back: public safety issues, child care issues.
They find something quite remarkable, which is that they don’t find much evidence of supply-side demographic characteristics, like household income, structure, motherhood or timing of childbirth, et cetera, to be very significant in the labor force participation. In fact, it has an effect on the level, but it’s not like the timing of the childbirth—you see this big drop-off and then they come back to the labor force and so on. They find that it’s mostly demand-driven, that actually female labor force participation is so low in India because the demand for women is very low.
There’s a second finding that they have. It’s bad news for India going into the immediate future, which is adverse economic shocks actually make this problem worse. Because a lot of the lack of demand or the fallen demand for female labor is because they’re getting displaced by the employment of male workers.
They find that when there’s an economic shock, like demonetization or current COVID constraints and things like that, you see women being driven out of the labor force.

Why this excerpt? Well, as a young student, you often get to hear that economists are working on topic “x”, or feature “y” – and when you start to read the work itself, one tends to miss out on asking the big picture questions. This exceprt, I think, helps you focus on just that: the big picture question.

What is the big picture question, you ask? Simple: is women’s participation in the labor workforce so low because the supply is low? Or because demand for labor supplied by women is low? Or both? And how does one go about answering this question? So yes, the age at which women get married, how much education they receive, and cultural impediments to they working are all factors to be considered – but hey, maybe there just is a preference to hire males instead of females as well?

It goes without saying: read the paper, but this should help you read it better 🙂

The first part of the interview is about how Ashwini Deshpande got into this field of research, and is useful reading to understand the role of “luck” in the development of your research interests, and also to understand the resistance to change in terms of new research areas for economics twenty to thirty years ago.

There are a lot of interesting points in the interview, such as, for example, problems with recording women’s work better than is done right now (and what happens if it is not recorded correctly). There’s stuff in there about the lack of meaningful linkages between women’s education levels and the jobs that ought to become available as a consequence – and this could be because of (a lack of) sanitation, and increased mechanization on farms, among other things.

The interview is also useful reading because it introduces you to the so-called “Indian enigma“. (Please read “Where India Goes” if you haven’t already, and here’s an old review of the book on EFE.)

Here’s a chart from her paper that posits a different explanation (I’ve copied it from the Scroll interview, but it is from the paper as cited below):

UC: Upper Caste, SC-ST: Scheduled Castes, Schedules Tribes, OBC: Other Backward Classes. Credit: Ramachandran, Deshpande, The Impact of Caste: A Missing Link in the Literature on Stunting in India

We found that regions where the self-reported practice of untouchability was higher, the child height for upper caste children was unaffected, which means that, for example, Brahmin children were not shorter, compared to regions where untouchability was lower. But the average height of Dalit children was shorter in areas with higher practice of untouchability, compared to heights in areas with lower prevalence of untouchability.
That gives us a mechanism about how stigmatisation and social ostracism might affect child height. The fact that you have to be at the end of the queue in terms of receiving social services, maybe you get excluded actively. There’s a whole set of social and economic processes which either completely exclude these children or put them at the end of the queue.
What this suggests is that the greater prevalence of societal discrimination is associated with a worsening of the stunting problem.

Now, you may agree, or you may disagree with her assessment – and that, of course, is more than absolutely fine. The idea, especially if you are a young student starting out on a voyage of discovery in the field of economics, isn’t to either form or change your opinion. It’s awesome to have opinions, and it’s awesome-r to have it change because of something you read or learn. But for the moment, to be informed about this body of work, and to go through it, would be a very good place to start.

As Ashwini Deshpande herself says in the interview:

Sometimes no number of facts can make people change their minds. Some people already have their minds made up. But such people are at the extremes. I believe a very large number of people believe in something because they don’t know better. They’ve just never been exposed to another way of thinking, another way of looking.
The idea is to expand that community of people. Reach out to the people who believe in something, maybe very strongly, but that’s only because that’s all they’ve ever heard. What CEDA is trying to do is to create an evidence base which is accessible. You can always produce evidence that is so obscure and so difficult to understand that nobody would want to engage with it.
But what we are trying to do at CEDA is, through pictures, through little data narratives, through short pieces, to summarise issues in a way that a lay person will find accessible. It’s like a ball that you set into motion, and hopefully it will spread to more and more people.
The more the number of institutions or portals that allow people access to data and debates in a democratic manner, the better.

There are some great recommendations at the end of the interview, both to read and to view, and if you haven’t consumed them already, you have your work cut out for you.

If you are interested in reading more about Ashwini Deshpande, here is her CV, here is her faculty page, and here is her Twitter profile. A word of advice: do not click open her Twitter profile if you are feeling hungry. You can thank me later. 🙂

24 “Underrated” Websites

Some are not underrated, some are downright weird, some (at least in my case) evoke nostalgia. Freerice, for example, helped me look busy for hours in my last corporate job. Your mileage will obviously wary, but I enjoyed going through this list.

And while on the topic of old websites, check this one out: Complete Review.

On The Inverted U Shaped Curve of Online Tribalism

An article in the Washington Post about vaccine hesitancy caught my eye recently, but for a weird tangential reason. The post is titled “How wellness influencers are fueling the anti-vaccine movement“, and it is about how “influencers” are impacting the vaccination drive in America.

Glance at Jessica Alix Hesser’s Instagram page and you may feel a little like you’ve just opened up a pamphlet for a meditation retreat. Amid photos of lagoons and a waterfall, Hesser (eyes closed, one hand touching the side of her face) is awash in rainbow-hued lens glare or soaking in a bath with flowers floating on top. Her website contains blog posts recommending natural cardamom floss and Gregorian chants.
Sprinkled throughout, however, are posts where Hesser urges her nearly 37,000 followers to question the safety of the coronavirus vaccines. “Would you sign your children up to be part of a pharmaceutical trial and take them into a lab to get shot up with some experimental drug created by a criminal company?” she asks in one June post. In another from April, she writes that “many of you have heard about the large number of poke-free women” experiencing changes in their menstrual cycles “after spending time with people who got the jab.” Medical experts say that’s impossible. Hesser did not respond to requests for comment.

But there are influencers and there are influencers, it would seem:

Still, it’s those with anywhere between 10,000 and 50,000 followers — sometimes known as “microinfluencers” — who are believed within the marketing industry to have an especially outsize impact on their followers. In a post last year for a blog owned by the Association of National Advertisers, Lesley Vos wrote that social media users “don’t trust celebs or experts with more than 100,000 followers anymore.” Micro-influencers, on the other hand — and their even more niche cousins, nanoinfluencers, with fewer than 10,000 followers — can seem less sold-out and more authentic, approachable or relatable.

So who are micro-influencers, and what is special about them?

Micro-influencers aren’t typical celebrities, experts, or public figures. They specialize in a particular vertical and share content about their interests only. Their audiences are hyper-engaged; so, if a brand works with a highly-relevant micro-influencer, it can extend the reach and user engagement significantly.
No surprise: consumers are more likely to buy from someone they know and trust. So if a micro-influencer whom they follow recommends something, they’ll trust this recommendation more than a direct ad from a brand. It’s where word-of-mouth marketing takes the stage.

This, apparently, is different from the market dominated by influencers without prefixes:

The problem is that users don’t trust celebs or experts with more than 100,000 followers anymore. Only 4 percent trust what influencers say online: People understand they post about a brand because it paid them for this ad. Authenticity and relatability are more important than popularity now. So, if you still want to get the most out of your influencer marketing endeavors, make sure to focus on micro-influencers in 2020.

Solve, as they say, for the equilibrium.

Hint: if we should be making sure to “focus on micro-influencers in 2020”, who should we be focusing on in 2021? 2022? 2023?

In plain English, here is what is happening: the incentive to monetize your following goes up with the number of followers you have. Alas, the folks who have reached “influencer” status have monetized their following a little bit too much, to the extent that there has been, it would seem, an erosion of trust.

That erosion is apparently across the board – for all influencers. Not just a particular influencer. And so the conclusion is that we should not trust influencers altogether, but rather trust micro- and nano-influencers. But then advertisers will want to, well, influence micro- and nano-influencers to influence their followers, and down the spiral we go.

I will note two things:

  1. There are a little less than four thousand people who follow this blog, and I can assure you that I have not been paid to hawk any good or service on these pages.
  2. I am not sure if I am a micro or a nano influencer, but if my urging you makes the *slightest* difference, please, go and get yourself vaccinated! 🙂

The Difference Between a Sociological and Psychological Story

I grew up in an age where the television series “Friends” was revered.

People considerably younger than me tell me that Friends is still revered, and there is probably some truth to that hypothesis. Every time I open up Netflix on my TV, Friends is regularly in the Top 10 shows in India.

Don’t worry, this is not about to turn into a snooty ol’ discussion about how Friends could be different/better. But I will say this much: I much preferred the first two to three seasons to the rest of the show. And the reason I preferred the first two or three seasons is because in my opinion, the first two or three seasons were about life happening to those six people in New York. It was observing New York through the eyes of these six people.

It helped that these six people were attractive and young. That helped in generating the kind of appeal that Friends has had for years now. But the reason why the first two or three seasons were, in my opinion, better than the latter ones is because they were sociological observations, using these lives of these six characters as a canvas. The latter seasons? Oftentimes, it seemed as if they were an extended riff on the “We were on a break” theme. In other words, it became a psychological story about what happened to these six people, and what about their psychological make-up made them take the decisions they do.

Not my phrasing (I wish it was). It simply is me applying Zeynep Tufekci’s model to the television series Friends. Here is Zeynep talking about Game of Thrones:

COWEN: TV show Game of Thrones — why does it interest you as a sociologist?

TUFEKCI: It interested me until the last season and a half —

TUFEKCI: — because before that, it was a very, very sociological thing. Here’s the thing. Here’s the difference between a sociological story and a psychological story.

In a sociological story, you can imagine yourself being almost anyone. Instead of terrible, evil characters and good people, where you just identify with the good ones — which is the classic Hollywood narrative, which is also most of human narrative, you have the good one, the bad one — it’s more like a complicated mythology where you can imagine yourself being any one of those characters, even the ones that do the terrible things, you can see yourself doing it.

The second sign of a sociological story, for me, is when nobody has plot armor because it’s the setting that’s carrying the story, with lots of people, but it doesn’t rely on one person dying or not dying. For six seasons, you have a very institutional sociology, very interesting. It’s like The Wire. People can die, but the story is still gripping because it’s sociological.

Here comes season — whichever the last season is — and all of a sudden, Arya can walk through fiery dragons and nothing happens. It just misses her by an inch. I’m like, “All right, you lost the plot here.” Plot armor essentially means you no longer have a solid sociological story.

I watched it with great interest until the end, and in the end, I’m like, “What just happened?” I wasn’t really very clear with the novel world. I learned that the novelist had run out of material, and the Hollywood showrunners were now writing the script. I’m like, “Ah, that’s what happened. They switched to the good-versus-evil story.”

They took a great story that was going to be how power corrupts, which clearly was the story, and in the end, they made the dragon lady snap just because she heard the church bells or something. [laughs] That’s not a good sociological story.

It’s a really good way (to me, at any rate) to think about why people say Seinfeld is better than Friends. Of course, you may not agree, and that’s obviously fine. But one reason why people say this might be is because Seinfeld is, to go back to my first example, about life happening to these people.

Roger Ebert, my favorite movie critic, often used to say that one shouldn’t ask what a movie is about. One should, instead ask how a movie is about whatever it is about. I can’t find the exact quote right now, but I think he was getting at the same point.

So ok, if you’re a student reading this, you’ve got one way to frame what everybody has felt about Game of Thrones. And you’ve got a way to think differently about Friends. But the large point is this: when you watch a movie, get lost in the plot and its intricacies, sure. But please, also ask yourself what you are learning about the society in which the plot, and the characters are based.

And here’s homework, if you are so inclined. How much of Michael Corleone’s decision making is a function of he being Michael Corleone, and how much of it is a function of he being who he is, in the family that he is from, the society in which he grew up, and his army background?

Or put another way: the really interesting question isn’t whether Michael and Sonny were different. In what ways were they similar, and why?

A fun thing to think about, if you ask me.

Final point: are you, like me, reminded of the Mahabharat when you read this paragraph?

In a sociological story, you can imagine yourself being almost anyone. Instead of terrible, evil characters and good people, where you just identify with the good ones — which is the classic Hollywood narrative, which is also most of human narrative, you have the good one, the bad one — it’s more like a complicated mythology where you can imagine yourself being any one of those characters, even the ones that do the terrible things, you can see yourself doing it.

Past EFE posts on Zeynep Tufekci here. Past EFE posts on sociology here.

How to Escape Education’s Death Valley by the Great Sir Ken Robinson

I’m not one for celebrating “days”, but I’ll happily admit being thankful that this video is scheduled for the 5th of September!

There’s No Say’s Law in Classroom Teaching

Yes, that’s not exactly what he said, but I’m going with the definition we all “know”. And I’m going to repurpose that popular definition for going on a rant about classroom teaching.

Supply does not create its own demand.

That is, the supply of education in the classroom does not create the demand for education in the classroom.

Do you have a memory of staring out the classroom window, having given up on waiting for time to move faster? My congratulations to you if you have never once experienced this emotion across school and college, because it was my only emotion in almost all classes I ever attended. And boredom of an excruciating nature was my only emotion because all classes were tremendously boring.

Some were instructive. Some teachers/professors really knew their stuff. Two professors, who I am lucky enough to still have as mentors, were the best professors I have ever had. But even they didn’t think it was their responsibility to inspire the class to learn more. A Walter Lewin type moment in a class that I attended? It has happened not more than one or two times across over two decades of sitting in classrooms.

And this is, even today, something that enrages me.

David Perell’s latest essay is the inspiration for this rant:

Inspiration is a uniquely human experience because it isn’t motivated by mere survival. It transcends the world of needs and lives in the world of wants. By doing so, inspiration stirs the mind. It’s no coincidence that the etymology of inspire is linked to “the breath of life.” As the sparkle of inspiration enters our bodies, we are animated with a video game style turbo-boost. Though a state of perpetual awe is the natural state for kids (which is why they learn so fast), it’s foreign to most adults. Too often, the wrinkles of age and the weight of responsibility silence the rush of epiphany.
Blinded by age, we can turn to cold rationality, valuing only what we can define and prioritize only what we can measure. When we do, we forget that the wisdom of an inspired spirit exceeds our ability to describe it. The less we insist on a justification for our curiosities, the more we can surrender to the engine of inspiration and let learning happen.

How do I teach my eight year old daughter to sum up the first n numbers? By asking her to memorize {(n*[n+1])/2} or by telling her Gauss’s story? Do I teach her Marathi and Hindi by asking her to read her textbook, or by introducing to her the shared civilizational wonder that is etymology?

Should I teach my students about how to think about macroeconomics by writing down equations and defining GDP, or should I begin with Gapminder? Should I draw the 2×2 matrix to explain the prisoner’s dilemma, or do I show students Golden Balls on YouTube? Should I tell students what monetary policy is, or do I ask them to play the Fed Chairman game? Should I tell them about demand and supply, or should I introduce to them the wonder that is

Should students be taught about mass, velocity, friction, acceleration, arcs and circles, or should they be shown this video? How to motivate students at the start of a semester on statistics? Talk about the spice trade, and talk about brewing tea! I can go on and on, but I’ll stop here.

You see, in each of these cases, you don’t have to teach students the underlying concepts. To be clear, you can, and you should. But my point is you don’t have to – they’ll have developed the thirst to figure it out by themselves, because, you see, they can’t help it. Their curiosity has been piqued, or as David Perell puts it, they’ve been inspired.

And that, really, ought to be your job as a teacher or professor. To get students to go “Whoaaaaaa!”

Get that to happen, and then good luck trying to finish the class on time. I teach undergraduates and beyond, and I’m not suggesting that one should stop at inspiring students as a teacher. Papers will have to be read, books will have to be recommended, essays will have to be written – all of that is necessary, and absolutely should happen.

But each of these things are much more likely to be done (and willingly) if only you light the spark first. Reading Mishkin after you’ve played the Fed Chairman game isn’t a chore, it is a joy. Why, even Fudenberg Tirole stands a chance of being somewhat palatable if students have been first exposed to Games Indians Play, The Art of Strategy and The Evolution of Trust.

Every student who leaves college bored to death because of how stultifying classrooms are is a damning indictment of my tribe. We’ve failed to do right by them, and by extension have failed to do right by society.

What is wrong with higher education? A lot!

But David touched upon a raw nerve where I am concerned – the worst thing about those of us working in academia is that we fail to ask ourselves every single day a very important question: how can I inspire young people to want to learn more? Everything else is a distraction, this ought to be the mission.

Arjun Narayan asked Tyler Cowen this question recently:

You have the power to grant 100% more capital (that they deployed in their lifetime) to a person or institution who prematurely ran out of capital too soon. Who do you pick?

Substitute the word “enthusiasm” for “capital”, substitute “students” for “a person or institution” and you have my own personal mission in life. And I promise you, it is my mission because I am very much scratching my own itch.

We should all, at the margin, be learning better.

And the earlier we start, the better society will be.

On The “Death” of Behavioral Economics

I don’t mean to go off on a spree about behavioral economics (although god knows I’m often tempted to!). And my apologies about the clickbait-ish title for today’s post – but it was the title of an essay that I want to speak about today.

Two primary reasons:
Core behavioral economics findings have been failing to replicate for several years, and the core finding of behavioral economics, loss aversion, is on ever more shaky ground.
Its interventions are surprisingly weak in practice.
Because of these two things, I don’t think that behavioral economics will be a respected and widely used field 10-15 years from now.

Is behavioral economics dying? Is it already dead? Did it never have, or need, a separate existence? If you are a student starting out on your journey of discovering (and most probably falling in love with) behavioral economics, how should you think about this question?

Every now and then (and more often than you’d think), it helps to go back to the basics. Here’s a definition of behavioral economics:

Behavioral economics (BE) uses psychological experimentation to develop theories about human decision making and has identified a range of biases as a result of the way people think and feel.

Read the entire essay by Alain Samson, please. It is a great, very readable introduction to the subject.

So if one were to accept that definition of behavioral economics above, it becomes a “testable” statement. We’ll come back to this point later on in this post, because it is a bit more nuanced, but in effect, if you wish to critique the field, you must ask the following questions:

  1. Do the theories about human decision making, as developed in the field of behavioral economics, really work? Do they make sense? Are they empirically verifiable? Have they been empirically verified, and that multiple times over?
  2. Are these biases that behavioral economics speaks of real? Do they make sense? Are they empirically verifiable? Have they been empirically verified, and that multiple times over?

This essay makes the point that the answer to these questions is no. Not, I hasten to add, all possible questions. But most certainly the question of whether or not loss aversion is real. What is loss aversion?

It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. People are more willing to take risks (or behave dishonestly; e.g. Schindler & Pfattheicher, 2016) to avoid a loss than to make a gain.

In effect, loss aversion says that celebrating upsides ain’t as important to us humans as avoiding downsides. And hey, that’s something all of us can empathize with, right?

But being able to empathize with a statement isn’t the same as saying the effect is real! That’s where testing comes in, and Jason Hreha is saying that the testing didn’t work:

But the biggest replication failures relate to the field’s most important idea: loss aversion.
To be honest, this was a finding that I lost faith in well before the most recent revelations (from 2018-2020). Why? Because I’ve run studies looking at its impact in the real world—especially in marketing campaigns.

Again, read the whole post. It cites papers (this one, and this one) to back up the claim by the author, that loss aversion ain’t real.

Is it “umm, whoops!” time all over again for behavioral economics? Alex Imas to the rescue:

OK, we’ve learnt about loss aversion. What is “framing”?

How you, well, “frame” a particular issue is what framing is all about. As Alex goes on to say in that Twitter thread, testing for loss aversion is one thing, and testing for loss aversion given the framing is quite another. In other words, it is the framing that may be the problem, rather than the concept of loss aversion itself.

In addition, there’s literature defending loss aversion:

Well, ok, you’ve read a lot today. But, in the immortal words of Go Goa Gone, what have we learnt, and what do we know?

My take: loss aversion is real. I say this for the following reasons:

  1. It makes intuitive sense (to me!)
  2. The original paper was hard to argue with
  3. There is plenty of research to back up the claim

But do we perhaps emphasize behavioral economics a wee bit too much? Well, I don’t know, but giddy enthusiasm for a subject is rarely a good idea. It is always a god idea to ask how one might be wrong. So while I tend to disagree with Jason Hreha, I would very much want to read more critiques of behavioral economics, precisely because the subject is so intuitively appealing.

And in that vein, this excellent NYT article from a while ago:

Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.
But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.

Put another way (and regular readers know it was only a matter of time), the truth lies somewhere in the middle.

No, behavioral economics is not dead, is not dying, and is in fact in the pink of health. But one shouldn’t overemphasize the role of behavioral economics either! It is of (immense!) help in reaching outcomes, and often for relatively low costs – but the price mechanism still, well, rules.

P.S. The art of reading critically is a very, very underrated skill. And especially in India, the art of listening critically, as a student, is even more underrated. We’ve been taught to assume that the guy behind the lectern knows best. And we carry that attitude over when it comes to reading stuff as well. As a student, acquire the skill of always questioning what is being told to you, whether in class or otherwise.

“How might this be wrong?” is a question that ought to be front and center when you’re learning. In fact, I’d go so far as to say that it is the best way to learn.

P.P.S And that applies to this essay too! Please, do try and figure out how I might be wrong! 🙂

And because I think this blogpost isn’t long enough already, one final recommendation. Read the conversation between Neela Saldanha and Alex: